tv [untitled] June 8, 2012 5:00pm-5:30pm EDT
beginning of the financial crisis, and as i mentioned in both my oral and written comments, they are more than sufficient to withstand the reported losses in this particular area. we are continuing to review as part of a -- one of the two prongs of our ongoing review is what exactly transpired with the trading operation within the cio's office, and we are looking to make sure there were appropriate limits and patrols on those activities in that area and how they compared to other similar areas within the organization. >> it is important that wall street reform implementation is completed to enhance financial stability and reduce systemic risk. secretary walden, just to be clear, it does not seem to be
the jpmorgan trading loss was systemic. do you agree, and what do you agree will be the implications of the recent losses at jpmorgan on the wall street reform that have yet to be completed? >> thank you, mr. chairman, for that question. obviously, the loss at jpmorgan chase was a big loss and one that will affect shareholders, but we concur in his judgment that it is not about the solvency of the firm or for that matter, the stability of the broader financial system. i think that what's clear is the lessons we all learned from what happened at jpmorgan chase will serve as important lessons, insights, into the range of dodd-frank implementation work to come, whether it's the volker rule or questions about risk management or enhanced prudential standards, or for that matter, capital, and i think this incident underscores the need for us to pay attention
to examples like this in order to learn those lessons, both with respect to dodd-frank implementation and as i suggested earlier, the broader efforts of supervision that are ongoing. >> secretary wolin, are regulators better prepared to deal with financial threats to our financial stability and economic growth like the euro zone crisis? what steps are you taking in response to this crisis? >> i think there's no question, mr. chairman, that is existence of the financial stability oversight council has given treasury and the various banking and market regulators of the u.s. government an opportunity to constantly monitor financial markets and the exposures of our banks our and broader financial system to what is going on in europe. the financial stability oversight council has spent a
lot of time on europe and thinking through what its implications are and might be to our financial system. that work, of course, is ongoing, but i think for the first time this council really gives the range of relevant entities of the u.s. government the capacity to share perspectives, to work together in engaging counterparts in europe to make sure that we are as well prepared and have thought through the various contingencies that might be necessary. >> governor tarullo, do you have anything to add to this? >> mr. chairman, with respect to european preparation, i'd just say that one thing about the euro zone problems, they've been with us for a long time, as a result of which, we have been able to regularize a system of oversight of u.s. financial institution exposures and activities in europe, so right after the first greek problems
arose in may of 2010 on an ad hoc basis, we began looking at these. over time, what we've been able to do, is put in place a system that allows us to check the positions and exposures of individual firms against aggregated data, whether from market sources or from so supervisory sources. other than that, i concur with what secretary wolin said. >> senator shelby. >> thank you. i think it's kind of a given here from what i read and what i know, stress tests, jpmorgan went through and so forth that they have more than adequate capital. i've been told that they would have to sustain losses 40 times, in other words, $70, $80 billion and they'd still be standing.
is that about right, governor tarullo? >> senator, in the stress test what we did with the trading book is to assume an instantaneous shock based on our very adverse scenario, which entailed trading losses of $128 billion. we also assumed over the period of the stress test credit losses of $56 billion, the sum of those gives approximately the number you indicated. >> comptroller curry, tell us, just walk us through, from what you know what was going on at jpmorgan. you know, were they managing risk, were they making money, were they doing a combination of what? everybody's got to measure risk, but in other words, what was really going on? you had people on site, right?
>> correct. >> they took a position, was that a position to manage something already done or could you explain it to us? i know it's complicated. >> that's actually the key question that we're trying to address, senator, is really what actually happened in this particular investment strategy. and it's a very complicated investment strategy both in terms of its size as well as complexity. we are looking to determine what the actually strategy behind that investment scheme was, and also if there were any other factors that were driving that strategy other than attempting to mitigate known risks in the banks' portfolio. >> whether it's a banking arena or some other arena, but
especially in the area of derivatives, you take a position and somebody else has a position, right? >> yes. >> if you win, you're looking great, you're looking smart. if you lose, you're maybe having a bad day, but you're not trying to take risk out of the market, are you? >> not necessarily. >> what are you really trying to do? from my perspective, i think banks ought to be able to take risk. they ought to manage those risks. the regulators ought to make sure that they know what's going on from your perspective and the feds' perspective of any huge risk they take, that it might, what, endanger the taxpayer. a lot of us, maybe not everybody, but a lot of us are worried about the taxpayer and bailouts and future bailouts. jpmorgan, as strong as they are, seems from your testimony and
others and what we know, was never in any danger. if they lost $2 billion or $4 billion or what. that's a lot of money, to me, and i guess it's a lot of money to them, but what did the comptroller's office know, and were you on top of things? how many people did you have at jpmorgan to kind of supervising or watching this? >> let me address the issue of the supervisory strategy with respect to risk management first, senator. number one, we're looking for the institution to identify and address the potential for serious risk within the organization. we're really not looking to eliminate all risk. if you did so, you wouldn't have a bank. the nature of a bank is to manage risk and to be profitable. the role of capital is really to
absorb those areas where risk is either unavoidable or occurs just because of the nature of the business. in the case of jpmorgan's national bank, which we supervise, there is ample capital, there's over $101 billion worth of capitals backing just the national bank and not the holding company. with respect to the actual supervision of jpmorgan chase, we have 65 individuals who are our core team of examiners who are resident at the institution. on top of that, we are able to draw upon a considerable reservoir of skilled individuals with expertise in a variety of credit market, capital markets and other areas that are brought in as a targeted exams or an as-needed basis.
we also work in connection and cooperation with the federal reserve system, which also supervises the holding company. in terms of this particular investment situation at the cio's office, we did begin to examine this early in april. our interest and concern intensified during the month as losses increased within the portfolio up to the point that the institution itself announced the significance of the losses that were incurred. since that point in time, our focus has been on managing and monitoring the bank's efforts to mitigate or de-risk that
particular portfolio with the objective of ensuring there's a soft landing of that particular position and to minimize both risk to the institution and ultimately to the dpoz it insuran -- deposit insurance fund. >> when do you think you'll finish your analysis of what happened and all this? >> we hope to do that as quickly as possible, and we also hope to use our findings to inform us as to what potential implications there are for the other institutions that we supervise and our large bank codray of institutions. >> thank you. >> senator reed. >> well, thank you very much. mr. curry, you have 65 personnel devoted to supervision. how many of them are in london?
>> we have five individuals who reside or are housed in our london office. >> and they are responsible for how many institutions in london? >> they are responsible for any national bank that has a global operation, especially with the presence in london, like a london branch office. >> so how many would that be, roughly? >> that would be -- i'd give you the exact number, but it would be roughly a half dozen institutions. >> half dozen. how common is it to have a risk office of a national bank located outside of the united states? >> in this particular case, the risk office is actually housed in new york where the global operations of the cio office are housed, so from a supervisory standpoint, our focus in supervising that and other global issues is really directed from our resident team in new
york. >> one of the impressions you get from reading the press is the cio office in london was -- had significant responsibilities with respect to the overall risk of the bank. in fact, the justification that's been publicly made is they were making -- taking these hedge positions, taking these investment positions to protect the bank from the overall portfolio of the bank, which is essential risk operation. can you explain? >> the individuals that are responsible for the managing the risk and establishing the parameters for the activities that may occur in the london office are housed in new york, and that is where the physical focus of our activity's been. >> and they reported directly to the chief management, or -- >> the chief executive officer, yes. >> and you're confident from your review that they had
complete authority to countermand or contradict or direct the operations in london? >> that is part -- the focus -- one of the focuses of our review is to determine the accountability, the involvement of management in supervising the design of the risk management controls and their monitoring of it. >> when the model for risk was changed, were you aware of that change, did you evaluate the new model? it took place prior to your assuming these duties, i understand that, you came about april 9th, and april 6th was the first indication of difficulties, but is that model evaluated by occ? >> there are hundreds, if not thousands, of models that are employed by large financial institutions to measure and monitor a variety of risks or
other functions in the institution. but under the authority of the applicable capital regulations, we are required to approve their capital-related models. there are other models that may be at issue here, management-related models or other models that would have been involved in this particular situation. we would not have had an express approval requirement of those models, but we would likely have been aware of them, and we're looking at our procedures for evaluating other types of models that are used by an institution such as jpmorgan chase. i would point out that a year ago, last april, the occ did publish written, formal guidance on the use of models by
occ-supervised institutions, and that guidance does outline the pitfalls and areas in which banks and bank management must assess in the use of models in measuring risks throughout their organization. >> mr. wolin, right now we face a serious challenge in europe with european banks who seem to be in a much more adverse condition than the united states banking industry based on capital and many other measures, as governor tarullo's testimony. to what extent did dodd-frank improve our banking position, vis-a-vis the european? >> i think both dodd-frank and the ability of the oversight council to come together and discuss and understand these things, but also the work of the fed and other regulators sitting at this table to undergo the stress tests that have been at
the core of making sure our banking system is well capitalized and well cushioned from other kinds of exposure that might have otherwise been important aspects of our being in a much better position than we were before dodd-frank and frankly in a much better position than our counterparts in europe. >> is that your view, governor tarullo? >> yes, senator. i think that beginning in 2008 and with the hearings that were conducted by this committee and your counterparts in the house in 2009 on reform, there was just a seat change in attitudes and orientation both respect to existing authorities and with the use of new authorities, and as secretary wolin indicated, particularly with respect to stress testing capital requirements, which, of course, are embedded now in section 165 of dodd-frank. i think we just all have a much
better handle on the positions that our banks will be in in the case of a tale event, which is to say the very bad, if low probability, outcome. >> thank you. thank you, mr. chairman. >> senator corker. >> mr. chairman, thank you, and thanks for the hearing. i do hope we're successful in having a markup on the menendez-boxer bill and hopefully it will happen soon. i know that in any big piece of legislation, 2,400 pages, there's going to be some good attributes. i know from my perspective as we get further and further in the rearview mirror, it's more and more evident to me that in many ways dodd-frank was a political response to a instead of real reform in many ways, and i do hope when this season is over and everybody talking about it being the best thing since sliced bread, will move on to exploring real reforms down the road. mr. tarullo, i do thank you for
talking about capital. i think that's our best buffer against financial institutions having trouble, and i think that has been a contribution, and mr. gruenberg, i appreciate you coming in and talking today about orderly liquidation. i do think, mr. chairman, i don't know how many people have gone through the fdic-proposed rules on resolution, but the words liquidation are throughout title two. i know senator warner knows that well, and i think we found that it's anything but liquidation and institutions will continue, and, again, i just think it would be great for us to understand that and think about whether there should be a chapter two title too, but let me move on to the issue at hand. i think it's a fool's errand to think regulators are going to be ahead of bankers, especially in these highly complexed
organizations, and the notion of having a regulator besides every banker is, again, a fool's errand, and i think we charged y'all with a lot of things we shouldn't have charged you with in the first place, but the real question, to me, i know that, look, jpmorgan lost $2 billion, i think, over a two-year period. they could lose like $80 billion and still be okay, yet we still haven't dealt with the $200 billion that taxpayers really loss with the gses, and i know people may be looking at this hearing and wondering why we're having it. the reason i think it's important is this is a real-life example of what volker may or may not be, and i know determinations are being made and since we have all the regulators here, and i'll start with you, mr. wolin, and ask each of you, what does this mean, risk, mitigating hedging activities in connection with with and related to individual
or aggregated possessions. by the way, we all understand volker's not in place today, so has no relevance whatsoever as it relates to what happened to jpmorgan, but what does that mean if an institution has tremendous exposure, does it or does it not have the opportunity once volker's put in place to hedge against a downturn in economic activities or activi activities there that might be adverse to the bank. i want you to tell me what this means and is portfolio hedging something you envision to be something that can happen or cannot happen after volker is fully implementing. starting with you.
>> is it related to individual positions, if you're hedging something related to that, then it's permitted, if it's something other than that, then it's not. the question of portfolio hedging means a lot by what you mean by portfolio hedging. if you're quote, unquote, hedging some macro risk that is not related as the statute requires it to be to individual or aggregated positions and the risks that come from those, then it is not permissible under the statute, but, of course, in the end, the regulators, with our coordination, will have to work through exactly the technical issues of what that means, they put out a proposed rule, lots and lots, 18,000 or so comments came in. they are working through that right now, but i think the question's not whether it's portfolio hedging or not, because the statute doesn't talk about portfolio hedging. it talks about whether it's associated with individual or aggregate positions that the firm has taken and put on their
books. >> and if you would as you go through, i assume that there's an order to have a political response to what's just happened during this political season. we could end up making regulations on hedging that make some of the highly complex organizations, if we're going to keep them like they are, even more risky, is that correct? >> you know, i think the whole goal here is to allow hedging, and that respect it's risk reducing. what we don't want to have done and what the volcker rule is about, is not having activity with the firm's money that the rest of us, the taxpayers, are ultimately on the hook for making hold. >> that's what i thought you'd say, thank you. >> senator, at the last hearing, we had a discussion of did the distinction between proprietary
and market making and i think the difference between proprietary and hedging trade, when you ask what does that provision, which is basically taken from the statutory language mean, at least with respect to hedging, what the proposed rule would do would be to put in place both some substantive guidelines for trying to distinguish between hedging of individual or aggregated positions on the one hand or proprietary trading on the other, and perhaps as importantly, put in place a set of risk management reporting and documentation requirements, so in essence, if a firm said we're doing this because it's a hedge, they would be required to explain to themselves, importantly as well as to the primary supervisor, what the hedging strategy was, how it was
reasonably correlated with the positions that they were hedging, and how they would make sure they they didn't give rise to new kinds of exposures, so i think you asked absolutely the right question, what does that mean, and that's the reason why in the proposed reg, there is both some substantiative guidelines but also some risk management documentation requirements. >> i would simply state, from a strictly supervisory standpoint, i think we expect all banks, large or small, to have robust and comprehensive asset liability management policies and practices in place. >> that includes portfolio hedging? >> it would depend on the risks in that particular institution that they are facing and could include that, but the issue, i think, as governor tarullo mentioned, is there robust risk management in place with
controls and limits that allows these risks to be addressed and mitigated without introducing additional risk, and i think that's the concern or issues the npr is trying to address. >> senator, i think the central issue here is hedging is a histor risk-management activity as opposed to a speculative nature where you're really trying to generate income, and i think the whole goal would be, and i think this has been the point that's been made, creating a set of controlling in which you can monitor the activities so that the legitimate and important hedging activity goes forward. if you're getting into riskier speculative activity, you want to be able to identify that. i think that's important for the institution to be able to recognize and important for the regulators to recognize. >> mr. chairman, i know my time's up and realize the
consumer agency is not particularly involved in that aspect, but i thank you all, and i do hope that political pressures of what has happened do not cause regulators to end up doing something different than they think is good for our banking system and i do hope down the road we'll look at some reforms that may work for us a little bit better and not put all the onus on having a regulator beside every banker. thank you. >> thank you. senator warner. >> thank you, mr. chairman. i want to pick up a little bit where my friend left off, one of the things you said was you were still here months after, at least looking into some of these jpmorgan accusations, at least trying to determine their strategy, and i believe governor
tarullo said that one of the results of what you envision a volcker rule being implemented might be is that determining this assessment of whether your hedging strategy would have to be laid out, in effect, ahead of time to make a determination of whether it was fit within the boundaries of appropriate hedging or bled into proprietary trading, do you think whether this particular morgan transactions fell in or out of the volcker restrictions or not, would the very nature of having this in effect, the sharing of strategy beforehand have perhaps given your office some more guidance and governor tarullo,
if you want to comment on that as well? >> i think the point i would like to make in regards to the discussion on the volcker rule and jpmorgan chase, we don't know all the facts, i think that's important as to whether or not the rule if in effect would have been applicable on this particular instance, but the point i would like to emphasize is this was a risk-management issue whether or not the volcker rule was in place, and the issues are similar in the sense that, you know, were there appropriate management controls in place in advance of the strategy, were there procedures and reports that enabled management to assess the risks initially and as they may have developed in the course of the execution of that particular strategy, so i believe that, you know, in any event, it's still